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CRC On The Sell Side
October 2005
In its second blockbuster deal of the year, CRC Health Group announced in October that it is being acquired by private equity buyout powerhouse Bain Capital for a whopping $720 million, a deal that is the largest by far of any transacted in the history of the U.S. addiction treatment industry. The sale comes after CRC surprised the treatment community in May, when it announced it would buy venerable high-end Sierra Tucson for $130 million, which is itself the largest sum ever paid for a single treatment center.


By acquiring CRC, Bain Capital has positioned itself as the owner of the largest collection of addiction treatment assets in the country, while CRC has a found a powerful new financial partner in Bain, one with substantial knowledge of health care through its numerous private equity and venture investments in the field.

For the industry as a whole, the deal is the clearest sign yet that the treatment business has firmly and perhaps for good put behind it the deep treatment recession that followed the onset of managed care, and the arrival of a first tier moneyed player like Bain is also a clear indication that the stigma arising from previous widespread industry profiteering, fraud and mismanagement has finally been lifted in the eyes of Wall Street.

"This is very definitely a watershed event for the treatment business," said Ron Hunsicker, president of the private treatment industry's largest association, the National Association of Addiction Treatment Providers, Naatp. "To my knowledge, this is by far the biggest deal in treatment history."

North Castle Partners, a private equity house specializing in healthy living investments that bought CRC just a few years ago, is no doubt set to make substantial profits from the deal, which is expected to close in 2006. While North Castle said that the CRC deal will generate the largest sum it has ever been paid on an exit from an investment, it would not quantify its profitability on the transaction. Partners with North Castle in its CRC play include such blue chip investment names as Credit Suisse DLJ Merchant Banking Partners and the Ontario Municipal Employees Retirement System, one of Canada's largest institutional investors. Monster-sized profits have been made recently by British private equity players who have been investing in European treatment providers. In July, Dutch banking giant ABN AMRO announced it would pay $1.5 billion for famed British rehab Priory in a deal that took out London-based Doughty Hanson, a powerful private equity investor, at five times its original investment. Doughty Hanson's holding period for its Priory stake was nearly the same as North Castle's CRC play, about three years.

While North Castle is not talking about how much it made from the Bain Capital deal, Karlin told Treatment Magazine this summer that CRC has spent between $200 million and $400 million acquiring treatment centers. Given that CRC was a leveraged investment for North Castle - although Karlin says the gearing ratio is just "modest" - its is likely that North Castle's rate of return from its CRC foray will be quite healthy, but probably won't rival that achieved by Doughty Hanson earlier this year in Europe.

Readers have made numerous inquiries to Treatment Magazine editorial staff wondering what Barry Karlin’s own financial stake was in the deal, but Karlin did not respond to an email asking for comment on what his personal financial participation will be in the Bain Capital transaction. However, Karlin did answer an email inquiry about whether CRC's balance sheet will continue to be as leveraged under Bain Capital's new ownership, saying he expects virtually no change in leverage near-term, but that debt will fall over the long term.

"We expect to move forward with little change in our strategy," said Karlin. “Bain Capital is fully supportive of our vision, which is one of the reasons we chose them." Karlin agrees that Bain Capital's purchase of CRC represents a sea change in Wall Street attitudes toward the addiction treatment business, and that the stigma surrounding the business in recent years has finally been lifted. "That is a very astute observation," he said, adding that there were more than 10 offers for CRC in a bidding process that was managed for North Castle by JPMorgan Chase & Co. and Merrill Lynch. "It was quite a lively auction," said Karlin "It clearly demonstrated that there is a growing and widespread attraction within the investment community to addiction treatment investment opportunities."

U.S private equity funds like North Castle and Bain, which buy private companies like CRC or take public companies private, have raised a record $80 billion this year. Some economists say these huge private equity money flows are being driven by a world "savings glut" that has seen too much money chasing too few deals. The new wall of private equity money, combined with a dearth of places to put it to work and the treatment industry's tempting high cash flows, is no doubt providing a powerful incentive for Wall Street to let bygones be bygones when it comes to the treatment industry.

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